Indian Prime Minister Narendra Modi’s wriggle room to relax his deficit targets just got reduced by Moody’s Investors Service.
On Thursday, the Indian government was talking about easing its budget goals as sweeping policy changes hurt growth and revenue.
Then, early on Friday, Moody’s upgraded India’s sovereign rating to the highest since 1988, prompting a U-turn from the administration.
“We’ll continue to maintain the glide path,” Indian Minister of Finance Arun Jaitley said at a briefing in New Delhi on Friday, referring to his plan to shrink the budget shortfall to 3.2 percent of GDP in the year through March next year and a decade-low of 3 percent the next year. “The upgrade is a recognition of the fact that India continues to follow a path of fiscal prudence.”
Jaitley’s words contrast with his comments to investors in Singapore on Thursday, when he said “challenges arising from structural reforms could change the glide path.”
He cannot afford to follow through on that now, because Moody’s one-notch rating upgrade is a bet that India will contain public debt.
Moody’s raised its rating on India to “Baa2” from “Baa3,” saying recent reforms would enhance productivity, stimulate foreign and domestic investment and foster “strong and sustainable growth.”
These include a new national goods and services tax (GST) and a controversial ban on high-value banknotes last year aimed at tackling widespread tax evasion.
Both S&P Global Ratings and Fitch Ratings rate India at “BBB-,” a notch above junk status.
S&P’s highest-ever rating for India stood at “BBB” in 1990 from which it was downgraded in March 1991.
Fitch Ratings’ current rating stands as its highest ever.
“The government will likely remain on the path of fiscal consolidation, as it is mindful of maintaining investor confidence,” Edelweiss Asset Management Ltd chief investment officer for debt Dhawal Dalal said. “There has been significant increase in positivity generated among foreign investors, as they have appreciated fiscal policy and various measures taken by the present government in order to improve economic growth.”
The rupee strengthened as much as 1 percent in Mumbai on Friday, the most since the middle of March, while the main equity index rallied 0.7 percent.
The yield on 10-year sovereign bonds, which slipped from a 14-month high to 7.05 percent, could fall to 6.95 percent by March, Yes Bank Ltd said.
It predicts the currency might strengthen further if Fitch Ratings and S&P Global Ratings follow Moody’s in upgrading India.
Currency and bond markets have come under pressure in recent weeks due to rising crude oil prices and talk of potential fiscal slippage.
“S&P and Fitch are more cautious and will not follow suit soon,” said Anthony Chan (陳祖傑), an Asian sovereign strategist at AllianceBernstein Holding Ltd in Hong Kong. “The upgrade cited reform progress, especially GST, but GST’s tax dilution was a disappointment and caused many to forecast bigger fiscal slippage.”
Chan was referring to Jaitley’s decision last week to slash tax rates on more than 200 goods and services.
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